B.C. housing taxes could put recent buyers underwater on mortgages

VICTORIA — British Columbians who bought homes last year in an attempt to borrow before a federal tightening of mortgage rules could be most at risk if the NDP government’s new housing taxes leads to a drop in prices.

Finance Minister Carole James reiterated Thursday her desire to “moderate” B.C.’s housing market with a new speculation tax unveiled this week, as well as an expanded foreign buyer tax, and a tax hike on home sales and school taxes for properties worth more than $3 million.

James has said her intent is to try to lower the price of housing. If successful, it could mean some recent buyers would find themselves holding mortgages for which they owe more money than they could recoup by selling their properties.

“The most worrisome is the people who bought in the last year,” said a University of B.C. professor and economist, Tom Davidoff. “If you bought three years ago, it doesn’t matter because prices have gone so high it’s very unlikely you’d go ‘underwater’. But if you bought in the last year you are at risk. And that year is the most worrisome.”

Underwater is a term meaning the mortgage owing on the home is higher than its market value.

Some of those buyers rushed to secure mortgages for more money than they’d otherwise be allowed to borrow under stiffer interest rate stress test rules that Ottawa introduced on Jan. 1. Those owners are particularly vulnerable to both interest rate increases and a decline in housing prices, said Davidoff.

It’s unclear how many mortgages in B.C. would be underwater if housing prices dropped. The most recent statistics were calculated by the Bank of Canada in 2016. That suggested a 15 per cent drop in housing prices would put one in eight mortgages in Greater Vancouver underwater, and a 25 per cent drop would put one in four mortgages underwater. The bank said Thursday those remain its most current calculations. The B.C. Ministry of Finance could not provide statistics.

“If there are people underwater, as long as your payments happen, it doesn’t matter,” said Davidoff. “Where it matters is when people can’t make payments … and then people start walking away. When people start walking away from their properties, that’s where you get the vicious cycle.”

B.C. is still a long way off from such a scenario. And it’s an unlikely outcome of a market correction anyway, said Troy Resvick, president of the Canadian Mortgage Brokers Association, British Columbia.

“If there is a decrease in values, for the existing owner I don’t think it’ll make a difference,” he said. “They’re not going to run away from their home because the price dropped by 10 per cent. They still have the utility of needing a place to live.”

There also remains default insurance for mortgages that go under, said Resvick.

“Could they potentially lose something there if the market adjusted? Yeah they could, but it would take a pretty heavy hit for most people,” said Resvick. “It would take a job loss or marital breakdown or something like that.”

Resvick worried instead about people continuing to be pushed out of the market because a drop in prices could spur more activity.

David Tha, a retired economics professor, says his pension can;t stand a $12,000 hit for additional school taxes.Handout /
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A potential drop in property value isn’t the only concern for homeowners.

Retired economics professor David Tha and his wife Paula Maisonville, also a retired teacher, own a home in Vancouver’s tony Point Grey neighbourhood that they bought 31 years ago for $370,000.

Now, the house is worth almost $6.5 million, making them eligible to pay higher school taxes. Under the new measures introduced in Tuesday’s B.C. budget, properties valued at higher than $3 million will be subject to 0.2 per cent tax on the value between $3 million and $4 million, and 0.4 per cent tax on the assessed value over $4 million, beginning next year.

Tha calculated that they will have to pay almost $12,000 in additional school taxes each year, which is not in their budget as pensioners.

“I’m beside myself because I’m looking at maybe another 20 years here and I don’t know how I’m going to be able to afford that tax,” the 72-year-old said. “We’re going to be taxed to death and we’ll be forced to move. My whole standard of living is shrivelling before my eyes and it’s all a result, in my mind, of inept political decisions.”

Tha said he may now have to defer his property taxes until he sells his house or he and his wife die and it comes out of their estate. It’s an option he hasn’t used before and that he resents having to consider.

“Essentially, what this punitive tax increase is going to do is make me go back into debt and have debt on the house, something that I have been working 40 years of my working life to make disappear, and indeed thought that I had,” he said. “It’s an option, but it’s a very sad option as far as I’m concerned.”

Those kind of examples are why Premier John Horgan should be clearer about his intentions for his housing reforms, said Opposition critic Shirley Bond.

“People do not understand what the intended outcomes are and has there been a really good look at what the unintended consequences might be,” said Liberal MLA Bond.

“You think of a senior sitting in a home they worked hard to acquire, what will be the impact on them? That new homebuyer, will they lose equity because of government policy?”

Bond said the government’s goal of tackling housing affordability is laudable, and admitted the previous Liberal government attracted criticism for not taking enough action. But she said there should have been clear modelling within the Finance Ministry of the consequences of the move, as well as a public explanation of the goals of the tax.

“It’s not enough for the finance minister to say people will understand what we’re trying to do,” said Bond. “They certainly will not understand if their most valuable asset is losing equity.”

Overall, the NDP’s mixture of housing taxes and $6 billion over 10 years to build new supply are a step in the right direction, said Tsur Summerville, the director of the University of B.C.’s Centre for Urban Economics and Real Estate.

“I think they did a really good job of trying to be very broad based,” he said, adding the taxes are “relatively measured,” as are the investments in the building of new supply. Where the government could go next is to work with municipalities to remove delays in approving housing projects, he said.

If the NDP government thinks housing prices are too high, a better approach would be to try and hold them steady for several years to allow people to catch up to the prices rather than force a sharp downward correction, said Summerville.

“If housing prices were flat for five years that would be a much slower but less disruptive way to help on this issue,” he said. “You really don’t want housing prices to have a sharp correction. That leads to bad things.

“It is a narrow tightrope because they don’t want activity in the market to dry up because there are a whole lot of jobs. We have more of the economy embedded in things that feed off of real estate than is really desirable. But quick changes can cause a lot of hardship.”

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